Shipbuilding Industry Collapses, Hits China and South Korea

Global overcapacity, plunging demand, and a price war

In the first quarter, South Korean shipbuilders saw their orders collapse by 94.1% to 170,000 compensated gross tons (CGT), compared to the prior year. In terms of dollars, orders collapsed 94% from $6.5 billion in Q1 2015 to just $390 million.

Global orders for new vessels in Q1 have collapsed too, but slightly less, according to the Export-Import Bank of Korea, cited by IHS Fairplay: down 71% year-over-year to 2.32 CGT.

“Their business slump may continue throughout this year, and demand for oil tankers may improve slightly during the second half of the year,” Korea Eximbank said in the report. Current order backlog will provide work for about two years. For all of 2016, orders are expected to plunge by 85%, from $23.7 billion in 2015 to just $3.5 billion.

Chinese shipyards are in even deeper trouble.

In May so far, three shipyards went bankrupt and began liquidation: Zhong Chuan Heavy Industry, Zhong Chuan Heavy Industry Equipment, and Zhoushan Xuhua Metal Material.

In April, Zhenjiang Shipbuilding, a subsidiary of Sinopacific Shipbuilding Group, commenced reorganization under bankruptcy proceedings. Another subsidiary of Sinopacific, Yangzhou Dayang Shipbuilding, is currently restructuring and plans to lay off 38% of its workforce.

Two days ago, Shanghai Clearing House announced that Sinopacific’s parent company, Evergreen Holding Group, has defaulted on 400 million yuan ($61 million) of one-year bonds it had issued just last year — part of the wave of corporate defaults building up in China

In February, state-owned Sainty Marine went bankrupt, the second state-owned shipyard to do so, after Wuzhou Shipyard, which had gone bankrupt in December 2015. Privately owned shipbuilder Mingde Heavy Industries had gone bankrupt earlier in 2015.

New orders for ships received in Q1 by shipyards in the Jiangsu province – where about 40% of Chinese shipbuilding and 16% of global shipbuilding take place – collapsed by 96% from a year ago. And some of the orders received earlier are getting cancelled.

Total order backlog at the end of the quarter at shipyards in the province had plunged 21% to 836 ships, totaling 50.9 million deadweight tonnage (dwt). For all of China’s shipbuilders, the order backlog is down 17% from a year ago to 120 million dwt.

According to local authorities cited by IHS Fairplay, of the 600-plus shipyards in the Jiangsu province, only 157 have started construction of new ships in the first quarter. The rest have nothing to build.

“Taking orders at current low prices is like a ‘slow suicide’ for shipbuilders,” an insider told IHS Fairplay. “However, without new orders, shipyards are waiting for death.”

China has long subsidized the entire shipping industry, including shipbuilders and shippers. But rampant overcapacity in the industry has destroyed the pricing environment and is now leading to capital destruction.

Many Chinese shipping companies received far more in subsidies than they generated in profits, according to IHS Fairplay including COSCO with 4.25 billion yuan in subsidies in 2015, China Merchant Energy Shipping with 2.08 billion yuan in subsidies, and CSCL with 250 million yuan in subsidies.

The government has been trying to cut back on subsidizing overcapacity. Alas… a local shipping expert told IHS Fairplay that without these subsidies, and this kind of collapse in orders, about half of the Chinese shipyards will go bankrupt.

This is the environment in which South Korean shipbuilders and other sectors in heavy industry are trying to stay alive. But according to the report by Korea Eximbank, they’re losing market share. The orders they received in Q1 accounted for a share of only 7.4% of global orders, down from a share of 30% a year earlier!

Korea’s shipbuilding industry faces tens of thousands of layoffs in a rigid labor market where lifetime employment is the rule, where laid-off workers rarely can find full-time jobs at other companies, and where the unemployment safety net is limited, pushing many of these folks into poverty.

About 205,000 workers were employed in Korea’s shipbuilding industry as of the end of 2014, according to the Korea Offshore & Shipbuilding Association. Hana Financial Investment Co. analyst Lee Mi Seon wrote in a report this month that 10% to 15% of workers in the industry are estimated to lose their jobs.

With average monthly income in the shipbuilding industry at about 4.5 million won ($3,800) last year — relatively higher than other industries — the layoffs could lead to a downturn in consumption and weigh on the regional economy, Lee wrote.

Unemployment claims in Korea rose 1.3% in Q1 year-over-year. But for example in the industrial city of Ulsan on Korea’s southeast coast, unemployment benefit claims jumped 18%. Bloomberg:

Many of the layoffs will be in industrial hubs along the southeast coastline, where shipyards and ports dominate the landscape. These heavy industries, which helped propel South Korea’s growth in previous decades, have seen losses amid a slowdown in global growth, overcapacity, and rising competition from China. As a condition of financial support, creditor banks and the government are pushing companies to cut back on staff and sell unprofitable assets.

Korean exports have fallen for more than a year and mounting levels of corporate debt are weighing down companies that need to find new growth engines.

The government is now trying to support the restructuring of these industries and help laid-off workers find a place somehow in some other function. It won’t be easy. Other countries too, including the US, have gone through deindustrialization and the brutal shifts it entails. But rarely has this happened as fast and furious as in Korea and China, where entire industries are on the verge of falling off the cliffs of overcapacity.

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

Wow! Now that’s a downturn that makes even coal look good.
My suggestion for one big S.Korean yard – get hold of a good frigate or large patrol boat design and move into defense work.
Australia has just ordered a big number of submarines from France so money for military is out there.
I’m not saying this is a GOOD thing, but with China laying claim to the territorial waters of about a dozen countries it would seem to be a trend.
I emphasize buying a proven design ( the Aussie boat on the TV series looks sweet) because huge amounts of money are wasted on designing from scratch. This and consulting fees can use up to 20% plus of the budget.
Canada got into ice breaker design (Polar 10.0) for probably a hundred million without cutting a piece of steel.

Siotu Teragaga

May 28, 2016 at 1:53 pm

That submarine you guys are about to build in Oz is an unproven dud. It is a modification of a workable design OK for shallow waters but for some reason the Ozzie brass want to give it enough range to patrol the Pacific- way beyond Australia’s littoral. Why? Is it you want a war with your largest trading partner? Well. If so, build ahead. Invest your nation’s future in violence and doom. Fact is, building war machines only guarantees one thing. You are going to get a war. There are better approaches to the future than this. Start by getting rid of your fiat money, central banks and fractional reserve banking. Get rid of your debt and start paying your way for a change (at one stage Oz nearly did. Minister Costello was about to pay down the debt but the banks warned him not to- wonder why).

John Doyle

May 28, 2016 at 7:13 pm

You are not well informed about debt. It is partly a problem where economics uses terms which contradict so called common sense. Government debt is one. Thus paying down government debt is a nonsensical proposition. It is actually government capital, not debt. So now you know why.
As to the subs, it’s safe to assume they know more than you do, not that’s a guarantee there will be no hang ups. In any case such spending increases the GDP. and no taxpayer dollars are used to fund the cost. Sounds like a win-win for the pollies and in our confrontational world not being armed invites trouble, like with Korea in the early 20th Century. Japan just marched in. War is pretty good for GDP.

Julian the Apostate

May 20, 2016 at 1:42 pm

We’re watching one pillar of the economy of the world collapse, which will take out related support industries as the dominos spread out like rings in a pond from a tossed stone. This will cause stress throughout the tangential industries which will then collapse the next pillar.

Chicken

May 20, 2016 at 1:46 pm

Obviously ships were being built like there was no tomorrow thus now a sinking industry with way too much capacity afloat. Wonder if they saw the bubble coming?

Yeah. Build more war ships. Mooaah war. That’s the answer. Build death machines and make the Pacific glow. .

d

May 28, 2016 at 7:00 pm

The French already made the Pacific glow.

nick kelly

Jun 2, 2016 at 9:25 pm

My comment about a South Korean yard switching to PT boats (or larger) was not about getting Chinese orders- they will build their own. It is about the large number of smaller nations who feel threatened by China’s grandiose claim to their territorial waters.
Indonesia is a prime candidate- it routinely has Chinese fishing boats coming within a few miles of its coast, while China claims waters 1000 miles away.
BTW: although China has said it is not bound by any international tribunal some commenters might want to acquaint themselves with the
legal difference in international law between a ‘coastal state’ and a ‘maritime nation’. Briefly ( and roughly) , you must have the ability to patrol waters to claim more than than the minimum limit- so a number of these small states must move quickly.

EVENT HORIZON

May 20, 2016 at 3:01 pm

To quote from the Post:

“…Total order backlog at the end of the quarter at shipyards in the province had plunged 21% to 836 ships….”

Without true “Price Discovery”, subsidies distorts reality, and as Ayn Rand (Author of ATLAS SHRUGGED ) said (wrote): You can ignore Reality all you want but you can not ignore the results.

So the Chinese (let’s be fair: and everybody else) subsidized Steel, Ship Building, Mining, Construction, Cement, etc. thinking that this “Cargo Cult” mentality will create a modern industrial society…..

BUT, the modern industrial society was built on Free Enterprise which, itself, is based on market forces which, by default, gives you the “Price Discovery”. With that, you know if you are making or losing money, because, simply, you either make a profit or you don’t.

People are so deluded, and stupid, that they can not see the BIG picture. Math never lies and Money Math never lies and is unforgiving. If you have Bernie Socialism, Marxist Communism, Hitler Fascism, or any other non-FREE Enterprise “economic” system, you will eventually collapse.

Only Free Enterprise is an economic system. All the rest are political systems. Hunter-Gather, Agrarian, Fishing, Feudalism (primitive Capitalism), Slavery, Capitalism, etc are all nothing more than systems of production. But, only Free Market Enterprise produces accurate Price Discovery, while all State or Political enterprises don’t. They can’t since they don’t exist to make a profit (evil), but to satisfy politics.

North Korea, Cuba, most of China have Capitalism (using capital to create factories or farms to produce products), but they are State owned and controlled Capitalist enterprises. They will fail.

We, though, created the most wealthy nation (society) on Earth, with constantly decreasing prices (based on gold) with increasing product improvements, since we had FREE Enterprise Capitalism (before we turned over our gold money to private printed paper notes).

Nicko

May 20, 2016 at 5:35 pm

Markets can remain irrational longer than you can remain solvent. ;)

Paulo

May 20, 2016 at 11:04 pm

Event,

I’m all for free enterprise. However, what is purported to be Free Enterprise in the US, and in other western countries, is crony corporatism…advantage goes to the best friend and not to the best product. A good example is the rescuing of Harley Davidson by Reagan.

You rant about Bernie and Socialism as if their message is different. Think of TARP and the Q packages; Privatise the profits and socialise the losses. Buy hey, out in the Hamptons they call it Free Enterprise. Look at Bain Capital. They do hostile takeovers and leverage the company with borrowed funds for dividends and bonuses. Then, strip the profitable parts and shut down the rest. If Tony Soprano did this he would go to jail. But a Romney, why he can run for President as a Free Enterpriser.

Basically, the little guy always gets it up the wazoo under one guise or another, and usually couched in some kind of ideaology.

Myself, I’ll continue to keep my head down, use cash, and keep my savings intact. I am one of the most conservative people I have met, always living below my means and never buying on credit. But i am proud to be called a socialist, thank you very much.

regards

EVENT HORIZON

May 21, 2016 at 8:38 am

You and I actually said the same thing.

As for you being an admitted socialist, I hope you volunteer to pay MORE in taxes and contribute everything you don’t “need” to the poor.

How much did you GIVE last year? Just wondering.

John

May 20, 2016 at 8:52 pm

Hey, go get trained in healthcare. Unlimited potential and earnings. Works in the U.S.

EVENT HORIZON

May 21, 2016 at 1:31 pm

To whom are you referencing?

Health care in America is falling apart, as the nation is, from way too much paper-work, regulations, law suits, anger, 3rd party involvement…….and it has become “anti-patient”, cold, and indifferent to the people, as all socialist/communist political organizations do.

I have 3 degrees. One IS in healthcare. The “saying” is: We don’t practice Medicine, we practice Medicare is absolutely true. Medicare is a LEGAL rip-off and scam, but, if you play by the rules, then according to your correct observation: “Unlimited potential and earnings”.

There is an Ophthalmologist in my area who bills, on average, $10 Million a year in Medicare billings. He follows the rules and works the system. It is legal theft and those, according to you “trained in healthcare” know it.

It is better for a doctor to know “Billing & Coding” than diagnosis and treatment. One gets paid for Exam Procedures and never penalized for a wrong diagnosis or treatment. You can put down whatever diagnosis you want, just as long as the “procedure code” makes sense,

And if you ask a few stupid questions (political-style, life style questions that have nothing to do with the exam) , you can “up code” and bill Medicare for more money while you do absolutely nothing more for the patient, …I mean customer…..I mean subscriber….I mean voter….whatever.

I don’t know about “falling apart.” I know that for the last 3 decades, it has gotten more and more expensive, and that’s a burden for the real economy. But it looks good on paper because health care is part of “consumer spending” in the GDP calculations.

I agree, Medicare abuse and fraud by providers is a serious problem.

BTW, we’re happy without our high-deductible plan and the tax-deductible health savings account (HSA) that comes with it. Bush signed that into law, and we’ve had this setup since 2006. If you’re healthy and earn enough to benefit from the tax deduction, it means nearly free health care. Thank you BUSH!!!

And we’re happy with our health care provider and insurer.

EVENT HORIZON

May 21, 2016 at 4:36 pm

The entire Medicare concept is itself the abuse and fraud.

In other words. Medicare is the crime, but if you follow their rules you are in compliance. Nobody questions the underlying “theft system” of Medicare….only if you steal according to their method.

Example. In the eye care business there are 16 different “eye exams”. IF you ask certain questions, etc (details would drive you all nuts), you can bill up to $250 dollars for the SAME actual exam that pays about $78. The exam of the eye is the same, but if you ask certain questions, you can “up code”.

So, one spends about 8 minutes with the patient and can either bill $78 or $250 (get paid 80% of that), do the examination of the eye, BUT if your staff asks a bunch of useless questions, you get paid more. Legal, yes, but the health aspect of the patient’s eye is meaningless. The exam, OF THE EYE, does not change.

So, a smart medical office arranges all examinations NOT to the health benefit of the patient, but to MAXIMIZE the “billing and coding” so as to get the largest check from Medicare, regardless of why the patient is really there. One only has to legally (documentation) cover their @$$ from a future audit, which is so easy to do.

The entire system is corrupt.

Greg S.

May 21, 2016 at 12:26 am

An interesting corollary to this article is that I just heard on the corporate media (so could be BS) the other day that cruise shipbuilding has just hit an all time high. Apparently you couldn’t get a new cruise ship built until 2020 even if you wanted to.

Demand for cruises as a form of vacation appears to be skyrocketing. I’m unsure what economics are driving this, but it would be interesting to find out.

Yes. Cruise ships is what saved the big French shipyards…. one of them built the two command ships (helicopter carriers) for Russia that it then couldn’t deliver because of the sanctions.

So cruise ships and naval vessels are hot…. if you have the right designs.

Agnes

May 21, 2016 at 12:58 am

Shirley this catastrophe must be gold and silver’s fault somehow…

John Doyle

May 21, 2016 at 1:52 am

Wolf, you are a constant bearer of good news – from a catastrophist’s point of view.
IMO, this will never turn around. We in the west live in “mature” economies which are declining in vitality every day since about 1970. Demand destruction due to demographics [a la Harry Dent] are compounded by boomer replacement generations debt levels destroying demand. It’s all we can do to maintain services.
Any forecasts as to when the Seneca cliff, the Wile-E -Coyote etc., moment will get into general consciousness ?

John, I’m not a perma bear. It’s just that over the past few years, the imbalances have pushed the economy and the markets into a very precarious position. From an investor’s point of view, I have never seen times more treacherous than our current era of easy money, QE, ZIRP, and NIRP.

John Doyle

May 21, 2016 at 5:10 pm

Indeed true, except I don’t think it’s just a cyclical downturn. It’s the end of our industrial civilization, our drive for everlasting growth and our wasteful use of resources.
I don’t have to tell you that the IMF forecast of 3.5 % growth means that our consumption will double all the growth – we have ever had to date – in 20 years, double again in 40 and so on. That is suicide.
Easy money is masking the decline.

Spock

May 22, 2016 at 10:38 pm

Nothing grows forever. Agree with you, this is the end of growth and the end of civilization. It is not a cycle.

Why does the end of growth mean the “end of civilization?” I don’t get the connection.

John Doyle

May 23, 2016 at 2:56 am

It’s inevitable. No civilization exists forever and we are a real spendthrift one making our time ever shorter. It is predicated on growth. But growth loss itself is not likely to be the cause. It will happen because we cannot afford growth forever. We cannot afford growth now. Even if population stabilised at today’s level it would not reverse the inevitable as personal consumption is still rising in the East, a large cohort of the population.
There are so many indicators of trouble that who knows which will trigger a noticeable drop? We disguise decline with credit, but that’s under strain now, as all your blogs demonstrate. Take your pick!
It won’t be a cycle as in the past when people could abandon their cities etc. and start again. We’ve ruled that option out. We are certainly not going into space. No one is making any plans to manage any crash either. So when trouble starts it will be a free-for-all. Check out Gail Tverberg’s blog for more detail, “Our Finite world”

frederick

May 30, 2016 at 4:07 am

İ agree 100% John this is most certainly NOT cyclical or at least not anything other than a century long cycle perhaps

Petunia

May 21, 2016 at 4:35 pm

I was a young bride during the recession of the 70’s, which lasted a few years. We lived paycheck to paycheck, and prices were rising rapidly, but the job market was a lot better even then. I have never seen it this bad for the average working person.

Mike Earussi

May 21, 2016 at 10:13 am

This downturn is nothing more than another normal business cycle just like all the others that all capitalist economies have experienced over the last 200 years. Get used to it, they’re never going away.

CV5

May 21, 2016 at 4:03 pm

Too many people and not enough stuff. That cycle is not improving eh?

d

May 21, 2016 at 3:47 pm

The British and the Germans built good ships, The Italians and french built fast not so good ships.

Then the Japanese started they learnt to build then design ships faster and cheaper. Then it got to expensive for them so they moved most of the industry to Korea and destroyed most of what was left of Good British and German ship building.

Now the chinese have undercut Korea and everybody else with cheap low quality State subsidized, copy’s, of good British, Japanese, German, and Korean ships.

So who will under cut the chinese or are they to be allowed with their state subsidy’s to build state subsidised shipping lines to completely control global shipping with all global profits moving only to china?

chinese state subzidys must be stopped/punished or the British and Germans must be allowed to use them to take back their industry’s again.

nick kelly

May 21, 2016 at 6:32 pm

Back when S.Korea was breaking into ship building but were still learning- one smart guy had the bow built in a Dutch yard and floated it to Korea where it was attached to the low skill part of the hull.

d

May 22, 2016 at 12:49 am

Various thing like that were done no real reason as all the good Korean Yards started out as Japanese.

The first Nuclear Enterprise carrier was lengthened about 40 Feet to makle it Longer than the Shinanao which the Japanese launch in 1944.

The only reason the Americans managed to sink it is that it was being moved with a skeleton crew that had the watertight doors open, and the pumping systems were incomplete. When it was torpedoed they could not close all the doors in time due to short crew.

Largest ship ever sunk by submarine.Took all day an two attacks totaling 4Torpedoes to finally sink it.

Nothing wrong with Japanese/Korean ships, they still share R and D.

EVENT HORIZON

May 23, 2016 at 5:05 pm

The Shinano was, in theory, an airplane carrier ship. She carried planes in a water-tight hanger?

d

May 23, 2016 at 5:47 pm

“The Shinano was, in theory, an airplane carrier ship. She carried planes in a water-tight hanger?”

Clearly you know SFA about ship’s.

Siotu Teragaga

May 28, 2016 at 2:18 pm

d

What nonsense. The West has become socialised and self-indulgent. In Germany every three productive workers support two non-productives. And that is without considering the army of bureaucrats and politicians that demands to be groomed and fed. So people can’t afford to have large enough families to make replacement population. The same situation repeats all over the Western world. You are now busy consuming your seed capital, so to speak. It won’t get better for you. As the famous saying goes, “For you the war is over.” In ther words, for you it is too late mate.

d

May 28, 2016 at 6:59 pm

Steel tariffs say other wise.

Steel tariffs are just starting and are just the start.

After steel gets protected from unfair underhanded chinese competition Every other damaged by chinese dumping industry will demand and get the same.

China cant survive, without that BIG monthly Export trade surplus.

No matter what lies it tells.

Think about that for a while. Wombat.

nick kelly

Jun 2, 2016 at 9:31 pm

At least Germany has productive workers. God, of all the countries to use as an example- the world’s most successful economy!
BTW: Germany for some of the past few years has been the world’s leading exporter- not China. They don’t do flip flops or Walmart.